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WES - WESFARMERS LIMITED


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Wesfarmers is another name that has benefited from government stimulus over the last 12 months, where cash handouts and builders incentives have driven a strong housing market and renovation boom.

 

Bunnings, with its stores remaining open throughout lockdowns, before recently changing to click and collect , has captured an enormous uplift in earnings, which are expected to grow 15 per cent for FY21.

 

While we rank Bunnings probably as one of the highest quality retailers around the world, it is maturing.

 

Before COVID 19, its same store growth rate had fallen from the high single digits achieved in the past decade down to 4 per cent just before COVID hit. It is currently doing 25 per cent same store growth purely due to the construction boom and the COVID 19 disruption.

 

Wesfarmers earnings are expected normalise over the next two years, and at the current price investors are paying 32 times FY22 earnings compared to the 20 times that it traditionally trades on.

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Some may argue times have changed, that lower interest rates and abundance of cheap money are pushing up asset prices, and we will have to learn to live with inflated multiples for high quality companies. But at what price?In our view, this is lazy investing. Investing involves finding the quality company and paying the right price, not one without the other. The incredible thing about the share market is that most investors have tunnel vision, and can only define stocks in two groups: hot stocks or not so hot stocks.

 

Valuation for those hot stocks is often irrelevant until earnings begin to turn. And not many people want to know about the “not so hot stocks” that lack a catalyst.

 

Wesfarmers and Woolworths are both examples of crowded trades where valuation seems to have slipped off the chart book of investor.

.Jun Bei Liu is the lead portfolio manager of the Tribeca Alpha Plus Fund .

 

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The other view on WES is the discipline in its investment process.

 

There was a 16 per cent rise in net profit to $2.4billion on the back of a 10% rise in revenue to $33.9 billion. Dividends have lifted 17% for the full year to $1.78 and a recent return of capital, of $2.3 billion or $2 a share, can happen given Wesfarmers had no net debt at June 30.

 

There is a discipline employed for allocating capital. Wesfarmers under Rob Scott has seen a shift in executive incentives to focus on ROE. The personal benchmark for Scott for achieving his bonus is an ROE target of 21.5 per cent, this year the number is 26 percent..

 

In the day to day management of the company, however, return on capital is the prime driver of performance. The Wesfarmers annual report says the ROC benchmark makes executives focus on increasing earnings or increasing earnings by managing existing assets efficiently, as well as making an adequate return on any new capital deployed.

WES has disposed of Coles, bought online shopping portal Catch, "repositioned" troubled discount department store chain, Target, ramped up investment in digital retailing and made a multibillion dollar bet on lithium production in Western Australia.

 

CEO Rob Scott said recently that it is rare for a conglomerate like Wesfarmers to have so many divisions doing well at the same time.

It is great and unusual in a conglomerate that all the businesses are firing at the one time, so I guess we are happy to take those positives while they are there, he says.

 

But also over the last year, we have been investing heavily in areas that are going to be important for the future. The Mt Holland lithium project, the investment we are making in data and digital and the $3.3 billion of online sales last year was a great outcome.

 

The results were pleasing but, you know, what I am really pleased about is we have got a lot of irons in the fire for the future.

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  • 3 weeks later...

WES will get API, lifting offer to $1.55

 

Wesfarmers Managing Director Rob Scott said that the Revised Proposal would deliver an attractive premium and certain cash return to API shareholders and was consistent with Wesfarmers focus on deploying capital in areas where it can leverage its unique capabilities to create longterm value.

Wesfarmers supports the community pharmacy model, including the pharmacy ownership and location rules. If the proposal is successful, we see opportunities to invest to strengthen the competitive position of API and its community pharmacy partners by expanding ranges, improving supply chain capabilities and enhancing the online experience for customers...

API would also provide the basis of a new Healthcare division of Wesfarmers and a platform from which to invest and develop capabilities in the growing health, wellbeing and beauty sector.
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  • 3 weeks later...

WES has acquired the 19.3% SOL stake in API.

 

Wesfarmers will pay $1.38 a share now and owe Soul Patts more later. It has offered $1.55 a share to acquire API and has 10 days left in its due diligence. With the Sigma offer at $1.57 but which is cash and scrip, with a 75% voting approval.... which may prove very hard.

 

 

Both WES and SIG are in the API dataroom; WES with 10 days left probably has not found anything untoward

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  • 2 months later...

there are probably a few steps (and likely missteps) to go until API goes, wither to WOW or WES

In the SC article, the very valid points are made that the decision could be tricky

https://www.sharecafe.com.au/2021/12/15/wesfarmers-makes-a-stand-with-api-holding/

  • WOW have a higher, cash bid, and only 50.1% acceptances as a threshold.
  • WOW could cope with not having full control; in fact it plays to the independence issues raised concerning the pharmacies
  • WES have the 19.3% stake but will they want to remain as minority partner?
  • In the event it is successful in acquiring API, Wesfarmers says it will keep data from the API Sister Club loyalty program separate from Wesfarmers own FlyBuys program, which it operates under a joint venture with major supermarket chain Coles.
Quote

This pledge came after a number of key API stakeholders raised concerns about the overlap between pharmacies and supermarkets on a number of products, namely beauty products, and the risk of the two loyalty programs competing for the same customers.

 

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  • 4 weeks later...

(Now that WOW has withdrawn), the API Scheme Implementation Deed with Wesfarmers Limited remains in place and is on track for completion in the first quarter of calendar year 2022.

In terms of the SID, it is proposed that a wholly owned subsidiary of Wesfarmers will acquire 100% of the shares in API that Wesfarmers does not already own, for cash consideration of $1.55 per API share.

.............. done deal, I would think.

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